How I Use Fundamentals and eSignal Charting to Trade

I have used a variety of different charting packages in my years of trading and eSignal is, by far, my favorite. My style of trading is always to use a combination of both technical and fundamental analysis. I have often seen fundamentals throw off technicals or technicals explain counter-intuitive movements that fundamentals cannot.

The trading strategy that I want to share with you is called the Vega Breakout Strategy, and it is actually one of my favorites because it applies both technical and fundamental analysis. In the world of options, Vega is defined as the amount that the price of an option changes when there is a 1% change in volatility. In currency spot trading, the reason why this strategy is called the Vega strategy is because it is also a volatility play.

A trader should look for a potential Vega Breakout trade when he or she identifies at least two days of contracting ranges where the high and low of each day is confined within the high and low of the previous day. The chart shows that we had two days of contracting ranges on 7/15/05 and 7/18/05.

Once you have identified two inside days, the strategy is then to place a limit order to buy on the break of the high of the first inside day and an order to sell on a break of the low of the first inside day. This basically becomes a non-directional breakout play. Once one side of the trade is triggered, a stop and reverse order is then placed to protect against false breakouts.

In the AUDJPY (AUDJPY A0-FX) example, the price first breaks below the low, triggering our sell order. However, it then reverses and ends up triggering our stop order. Because we have a stop and reverse order in place to prevent against false breaks, our buy order gets triggered on the top side at 84.50. The currency pair then proceeds to rally to a high of 85.66 the following day.

The reason why this strategy uses both technicals and fundamentals is because, if the consolidation is a result of market uncertainty ahead of a big piece of economic data or event, the breakout becomes much more meaningful. For example, this means that, if I see the Vega Breakout Strategy before Non-Farm Payrolls, I would have a bias to overweight the position for a breakout. Alternatively, if it occurs during a relatively quiet week, I would probably apply the same strategy but take a smaller position.